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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Understanding Money Behavior in a Financial Crisis

by Laura Rowley

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Posted on Wednesday, December 31, 2008, 12:00AM

One of the keys to surviving the economic crisis, at least from a psychological perspective, is recognizing what you can and can't control. And not doing destructive things while you're powerless.

Asserting Control

In 1950s, psychologist Julian Rotter developed a concept called "locus of control." Contrary to Freud's notion that human beings are a simmering stew of unconscious drives, Rotter argued that personality is a function of interaction with the environment. Depending on how their efforts have been received in the past, people develop an internal locus of control -- a belief that success or failure comes from their own efforts -- or an external locus of control -- a belief that luck, chance, or other people largely determine outcomes.

People can move along the internal-external continuum depending on the situation. Rotter's work became highly influential in education, medicine, and economics. Studies in the 1970s, for example, found that giving hospital patients and nursing home residents a stronger sense of control resulted in better health outcomes.

How we choose to deal with the powerlessness wrought by the economic crisis is not trivial, given the mounting number of related suicides. I tracked down Rotter, 94, who's a professor emeritus at the University of Connecticut, to find out which locus of control can help people cope with the current mess.

Inside/Outside

"It depends," he said. "People who are more internal tend to blame themselves because they think they had control over what happened. People who are external think it's all chance or luck anyway and are more likely to shrug it off."

On the other hand, he adds, "A lot depends on how they classify the event beforehand;

a lot of people are internal but realize to begin with that they don't have any control over the stock market. It also depends on whether they chose the stocks themselves or an investment company did the choosing for them. [In the latter case] they're more likely to realize there's more chance involved than they thought."

Similarly, someone who gets laid off can blame their own performance, or view himself as an unlucky fatality in an economic storm. "People who are more internal work out a strategy to prevent it from happening the next time," says Rotter. "The internal [person] is always more likely to try to do something to fix it. But not everything in the world can be controlled by individual people."

Status for Sale

And there's the rub -- a feeling of powerlessness can trigger irrational responses that exacerbate financial problems. A paper published earlier this year in the Journal of Consumer Spending, for example, found that a state of powerlessness increased consumers' willingness to pay for status-related products.

"Low power is an aversive state marked by a lack of control," says Derek Rucker, co-author with Adam Galinsky, both of Northwestern University's Kellogg School of Management, of a study on powerlessness and consumerism in the Journal of Consumer Research. "If I have more of something than others, that's one thing I can use to compensate for being powerless -- I can acquire status."

Study respondents were asked to write about a time when they felt powerful or powerless. Afterward, they participated in an online auction that included high-status goods such as a fur coat and a silk tie. "For products with low or no association with status, there was no difference in the reservation price for those who had power or those with no power," says Rucker. "But for products associated with status, those who recalled they didn't have power indicated they were willing to pay more for them."

Paths to Power

Rucker says when it's difficult or impossible to directly confront the issue that's causing powerlessness, "a consumption decision becomes one means of fulfilling that need for power. At least for some individuals it could create a cyclical downward spiral."

To wit: I recently heard a story of a man who, shortly after his layoff, decided to add a third floor to his home. Similarly, a friend who lost money in the market told me she has been spending more than she did before the loss, on expensive furniture and the like.

Rucker says the spiral can be avoided simply by being aware of the phenomenon: "Alerting them to the behavior may be enough to change it. You can think about why it is you want this product -- is it because you're feeling powerless? Are there ways to circumvent this through more positive means -- means that don't have disastrous outcomes for spending?"

Out of Control

Another reaction to powerlessness is seeing patterns and connections that don't exist, leading to poor judgment, according to research published in Science by Galinsky and Jennifer Whitson, an assistant professor at the Macomb School of Business at the University of Texas, Austin.

Subjects were presented with a series of "snowy" pictures, some containing images and others random dots. People who felt they lacked control more often perceived images in the latter. In another experiment, some participants were told the stock market was currently a volatile minefield and others that it was calm and predictable. Then both were presented with an equal amount of positive and negative information about a company, and asked whether they would invest.

Those primed to feel powerless by volatility "were more likely to make strong conclusions about [investing] that were unwarranted," says Whitson. "Those who chose not to invest remembered more negative phrases than they had seen."

Restoring the Power

Researchers found that reminding people of their core values reversed the effect. Before their experiments, Galinsky and Whitson asked participants to rank by importance a list of six values, such as knowledge and connection with others. At the end of the experiment, participants were given questionnaires and asked to write about either their most or least important value.

"Among those who got chance to affirm something central to their identity, their perceptions of patterns returned to normal -- whereas those who did not get a chance to affirm values still saw patterns that were not there," says Whitson.

"My gut tells me that when people knew they could control what they thought was important in their lives, it returned to them that sense of ‘the world might be crazy but I know what's important,'" she adds. "No matter how out of control the world is, the one thing we always have control of is what we decide to care about."

Survival Through Reinforcement

Rucker agrees, adding that a sense of power can be restored by having a close friend affirm what they value about you: "It's not enough to think to yourself why you're good -- you need others pouring in support for you."

Financially speaking, it helps to be conscious of what you can control: managing spending, boosting income by moonlighting or selling goods on eBay, evaluating how much risk you're really comfortable with, and reducing investment fees. Then set achievable goals. For instance, the Standard & Poor's 500 Index fell about 40 percent in 2008, wreaking havoc with college and retirement portfolios. Figuring out how to save more in 2009 -- rather than day-trading in hopes of rebounding from losses -- is a more rational response that will help restore a sense of control.

Finally, try to put financial problems in historical perspective, Rotter suggests. "I've lived a long time and there were extraordinary events going on all through my life -- starting way back in the Depression," says Rotter, who was in his 20s at the time. "For a lot of people, that was far more crushing than this recession. You had to react by figuring out ways to survive through [your] own efforts -- and that's very strong reinforcement. It had that effect, at least, on me."

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95 Comments

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  • wayne b - Wednesday, January 7, 2009, 5:29AM ET  Report Abuse

    • Overall: 5/5

    Good article. A little deep for me but it does make sense. Thanks Laura.

  • R A Bottens - Tuesday, January 6, 2009, 11:12AM ET  Report Abuse

    • Overall: 1/5

    Lacking facts and figures. As far as internal control goes....you have internal control over your bowels and your bladder. As far as financial advice I didn't get anything of any practical use from this column. The real crisis is trying to figure out how an article like this made it into Yahoo Finance this should have been in Psychology Today.

  • Andrew - Monday, January 5, 2009, 11:19PM ET  Report Abuse

    • Overall: 4/5

    Gold has been a great way for me to be assured that I still have control of my finances. Gold is a store of wealth and holds it's value over time. For example, in Roman times, one could buy a good toga and a very nice pair of sandals with an ounce of gold. Today, the equivalent amount of gold would buy you a good suit and a very nice pair of shoes. Gold may not be an 'investment', but it beats losing money through inflation. (www.jwsgoldsilver.com)

  • Once a patriot - Monday, January 5, 2009, 4:05PM ET  Report Abuse

    • Overall: 5/5

    5 stars for at least showing the strings that are being played. Every single aspect of the media is to control the masses, to wit: buy,buy,buy. We are merely consumer units,and the best way to make us spend is FEAR....You are fat, ugly, poor, poor health, not as good as the Jones' etc etc..Most people just want a good life, and stability, but there is no profit in your contentment, you are constantly kept on edge, off balance, with ever higher expenses, fees, and costs...which make you panic,and go out and stock up on what you need, or give you some peace. Spend spend spend, or be priced out forever? We are heading for a depression, and by we I mean the bottom 80% as when you are hungry, tired, panicked....you can be controlled that much easier.

  • Yahoo! Finance User - Monday, January 5, 2009, 3:24PM ET  Report Abuse

    • Overall: 5/5

    Maybe we'd have a better chance surviving these things if the media would do its job reporting on them before and while they are happening. American jounalism is D-E-A-D! check out: clearspeak.wordpress.com/

  • Yahoo! Finance User - Monday, January 5, 2009, 3:13PM ET  Report Abuse

    • Overall: 5/5

    Why should anyone believe ANYTHING that is in the "main stream" media in this country anymore? For honest, real, insightful commentary check out: clearspeak.com.wordpress.com/

  • Yahoo! Finance User - Monday, January 5, 2009, 2:05PM ET  Report Abuse

    • Overall: 1/5

    "New Year, New Possibilities." Why on earth does a new year mean our condition has changed??!?! You can still expect thousands of defaults on mortgages; Automakers will inevitably collapse (they are already technically bankrupt); Hundreds of hedge funds will fail, afterall they are only supported by withdrawal limitations; Liquidating Hedge Funds, Banks, and Institutions will continue to drive down the market; The US$ is ALREADY devalued and will be worthless as soon as the illusion of the Treasury safe haven fades; the Treasury BUBBLE will burst, and countless billions will evaporate as inflation wipes out the savings (as little as it may be) of the American Baby Boomers; Subsequent generations will struggle to find manufacturing jobs at depressed wages, and will be unable to save for their own retirement; and finally, King OBAMA will save us all. Amen.

  • Yahoo! Finance User - Monday, January 5, 2009, 1:37PM ET  Report Abuse

    • Overall: 5/5

    Obama himself has stated "the economy is only going to get worse." But poeple are basically stupid and continue to throw money into the market.The U.S. auto industry will keel over, The housing market is continuing to burst, unemployment may reach 20%, Banks wil not see gains for at least 5 years, CD rates are in the toilet, The Fed is bankrupt, More stores will close this year than in any other period after the Great depression. deflation is choking the economy.Read about the Russian Proffesor that predicts the U.S. wil break into at least 4 separate entities come 2010.Google it.

  • Yahoo! Finance User - Monday, January 5, 2009, 1:36PM ET  Report Abuse

    • Overall: 1/5

    Pretty sick of this article, do we have a writer's strike???

  • Yahoo! Finance User - Monday, January 5, 2009, 12:51PM ET  Report Abuse

    • Overall: 4/5

    "Researchers found that reminding people of their core values reversed the effect."--This is why I appreciate Laura's columns, because they serve this function of reminding people that the purpose of money is happiness, defined according to their own values. I'm much less susceptible to "keeping up with the Joneses" than most, but Laura's sensible reminders certainly seem to help a lot of people.

  • Wes - Monday, January 5, 2009, 12:47PM ET  Report Abuse

    • Overall: 5/5

    You know what we can't control? Our money supply! The Fed has caused this "Crisis" and the Fed will continue to cause booms and bust until we take back the control to issue our own money as the constitution says congress has the power to do. We need sound money to have a stable economy! Until we take the power from the banks to issue our money, our whole economy is a joke. They create almost all of our money out of debt to the point that if there were no debt, there would be no money. Inform yourself on how money is created and you will see that this Crisis is a result of our fractional banking system. This will happen over and over until we take back the power from the banks to control our economy! Wake up!!

  • Yahoo! Finance User - Monday, January 5, 2009, 12:30PM ET  Report Abuse

    • Overall: 4/5

    Another good article Laura! As a side-note: Does anybody think that dummy Mick Weinstein will be back in 2009? I don't. HaHahaHAhahA!!!!

  • Humbert - Monday, January 5, 2009, 12:10PM ET  Report Abuse

    • Overall: 5/5

    Laura, thank you for your work. You have a sharp talent for translating behavioral finance discoveries into practical application for your readers. You just do not come across this sort of information with any sort of consistency except in your articles. It is a tremendous benefit to all who read your work - unfortunately as you point out here, many will suffer needlessly simply by not having the perspective you provide here. It isn't the end of the world. It is bad but not fatal and we will deal with it like we always do.

  • Steve - Monday, January 5, 2009, 9:59AM ET  Report Abuse

    • Overall: 1/5

    This is a must read piece for all of the weak minded people who need their hand held and told "it's all right, it's not your fault. You just need to recognize what you can and can't control." Although you can't control everything, you CAN prepare, react, and profit from any event. As usual, Rowley is writing to those who need to be told that it's not their fault they're a failure.

  • Octopus - Monday, January 5, 2009, 9:33AM ET  Report Abuse

    • Overall: 2/5

    Everything is about luck. "Internal control" is an illusion. Belive me, I tried that "Internal control" thing annd it doesn't work.

  • Yahoo! Finance User - Monday, January 5, 2009, 7:53AM ET  Report Abuse

    • Overall: 1/5

    Where are all the experts that consistently and reliably predict market movements, economic downturns, bursting bubbles, financial crises, etc. ?THEY DON'T EXIST. None of these people know any more than the typical reasonable intelligent person that takes the time to educate themselves on financial matters and the economics. Stop letting yourselves be scammed by these pretenders.

  • Yahoo! Finance User - Sunday, January 4, 2009, 10:25PM ET  Report Abuse

    • Overall: 5/5

    I read the article thoroughly. It was interesting in a way that was fresh psychology to me.

  • Yahoo! Finance User - Sunday, January 4, 2009, 8:40PM ET  Report Abuse

    • Overall: 1/5

    Crap.

  • Michael G - Sunday, January 4, 2009, 6:58PM ET  Report Abuse

    • Overall: 5/5

    Great article. The naysayers just do not get it. Think and Grow Rich comes to mind.

  • David - Sunday, January 4, 2009, 1:14PM ET  Report Abuse

    • Overall: 4/5

    Very insightful. One sees these different types of behaviour emerge very early in their children and the way they deal with school studies, athletics, and peer pressures. Eg., it tends to be the "teacher's fault" or "I need to study more."

  • Alex - Saturday, January 3, 2009, 2:53PM ET  Report Abuse

    • Overall: 4/5

    I am amused at how many of the comments left here affirm the "locus of control" argument, regardless of whether or not the commentor agrees with the "locus" theory. CHRISTOPHER.JFW1- Do you really think that you can "basically control everything with hard work"? If that is the case, then you should quit your job and simply invest to make $. I find it amusing that people read Yahoo Finance when they already think they know everything...

  • SFBayNative - Saturday, January 3, 2009, 2:06PM ET  Report Abuse

    • Overall: 5/5

    If you fail to understand the basis of your decisions you are more likely to make less rational ones. To those who see this article as useless or justification for people not doing well are missing the point. Look deeper, there is good stuff here a smart person can use.

  • Yahoo! Finance User - Saturday, January 3, 2009, 12:28PM ET  Report Abuse

    • Overall: 1/5

    Now lets all hold hands and sing Ring Around the Rosie. Completely useless column.

  • Yahoo! Finance User - Saturday, January 3, 2009, 9:30AM ET  Report Abuse

    • Overall: 5/5

    Excellent article. The underlying principles outlined in this article apply to dealling with any crisis in life and, yes, they do work. Also, life and especially finances usually goes in cycles. To never expect them to come is foolish. Preparing, saving, and getting good advise goes a long way. Also, we sometimes have to get creative, stay close to God and our values, and to each other. Often the writing is on the wall and we need to listen and take timely advice. And let's remember, especially in America, we still are better off than 90% of the world's population even in these times!

  • Yahoo! Finance User - Friday, January 2, 2009, 10:31PM ET  Report Abuse

    • Overall: 1/5

    To say people cant control certain aspects of investing is foolish. You can basically control everything with hard work. yeah, you may not be able to control the daily movements of stock fluctuations but you can control risk and limit losses. Most people use the "I cant control certain things" comment as an excuse for being inept and not knowing what they are doing. Shame on you if your account was down 40% in 2008. The writing has been on the wall and 2009 will probably be down about 15% for the year!

  • monkeyfurball - Friday, January 2, 2009, 10:07PM ET  Report Abuse

    • Overall: 5/5

    Take control of your life. Do it and quit whining that you have no control. I grew up on welfare for 18 years. Didn't have a penny to my name. I'm now a multimillionaire and owner of a thriving wholesale distribution business. If you think you can't do anything about your situation then you are already a loser.

  • Yahoo! Finance User - Friday, January 2, 2009, 3:45PM ET  Report Abuse

    • Overall: 5/5

    Tell me I am good and I might just make it financially.

  • Mark - Friday, January 2, 2009, 12:56PM ET  Report Abuse

    • Overall: 1/5

    This "touchy feely" garbage has nothing to do with finance. A person's success depends on their efforts, including defense against external forces like self serving scum bags in government engaged in plunder of the american people. Also, Comparing the "more crushing" depression to 2008 infers we are at a low. This is premature and irresponsible reporting.

  • Nick Name - Friday, January 2, 2009, 12:26PM ET  Report Abuse

    • Overall: 1/5

    Laura TEETH Rowley does it again. Ending 2008 on a predictable note. More psychobabble rivaling the best of Penelope Trunk. ""Low power is an aversive state marked by a lack of control," blah, blah, blah, yadda, yadda, yadda. D-OH !!!

  • Yahoo! Finance User - Friday, January 2, 2009, 12:20PM ET  Report Abuse

    • Overall: 5/5

    Excellent piece again -- this time more informative and analytical than entertaining -- with both the information and analytics non-trivial and useful. It's interesting how the comments of those who gave it 1 or 2 stars also expose their putting locus of control outside (government is something which is forced on people etc). This is not to say their viewpoint is without merit; it is just they did not get the centerpiece: "the one thing we always have control of is what we decide to care about". You want to spend your life complaining about the government you can't affect -- be my guest. Alternatively, spend 10 minutes and/or 50 dollars to send an e-mail to your representative / support your chosen politician or law / vote a year and forget about the rest of the politics for the rest of the year and focus on optimizing your own affairs rather than foreign affairs (that's what I try to do). Choose for yourself..

Showing comments 6-35 of 95<< PreviousNext >>
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